Chief Economic Advisor Arvind Subramanian today defended a three-rate structure for GST, including a demerit or 'sin' tax of 40 per cent on products like tobacco and luxury cars, saying the recommendation is based on the current tax structure.
The panel headed by Subramanian had on Friday recommended a three-rate goods and services tax (GST) structure of 12 - 17/18 - 40 per cent, the last category being for luxury cars.
He said currently many of the luxury goods "are already taxed at very high rates" and the recommendations are "just a status quo".
"I do not think there should be any concern on that," he said, adding that the panel has recommended "a very narrow list of things" for the so-called sin tax.
Stating that his committee was in favour of keeping such a list limited with clearly-defined items, he said the issue will be discussed in the GST Council.
"Our recommendations on the demerit rate are very much based on what happens currently. De facto, some of these goods are taxed at close to what we are recommending. So, we are not changing anything," he said.
The panel has not increased any existing tax or added more goods. "We are just codifying the status quo," he added.
On recommending abolishing the proposed 1 per cent additional levy over and above the GST rate on inter-state movement of goods, he said the abolition is necessary to realise the mission of Make-in-India, which essentially can be done by "Making-one-India".
Giving states powers to levy 1 per cent additional tax over and above the GST rate will "favour production overseas than production in India".
"... We do have some illustrative analysis and calculations in the report, which show that by and large the manufacturing states are also going to be big consumers of services," he said.
Defending the panel recommendation of not including the GST rate in the Constitution Amendment Bill, Subramanian said a look around the world shows that the minute details of tax policy should not be put in any Constitution for a number of reasons.
"First, these are details and choices that have to be made via political process. Second, if you cast these things in stone, they become irrevocable. When at some future point suddenly circumstances change radically, it can lead to huge problems. That is why it is wiser to leave it to the political process," Subramanian explained.
He believes that overall the impact of GST on inflation is going to be "very minimal".
The panel recommended a range for revenue-neutral rate at 15-15.5 per cent and standard rate at 17-18 per cent as it was "not possible to say with a degree of confidence" that one particular rate is the right rate, he said.
The recommendation to bring petroleum, alcohol, real estate and electricity under the ambit of GST is owing to the consideration that "the tax base has to be as wide as possible".
"Therefore, the rates are as low as possible because it is good for the consumer, it is good compliance, it is good administrative efficiency. That is what we should work towards," he said.
While manufactured consumer goods will become cheaper as
the incidence of excise duty and VAT will come down from 25-26 per cent at present, the cost of services would by and large, go up from the present 15 per cent levels.
Currently, a consumer pays 25-26 per cent tax over and above the cost of production due to excise duty (peak of about 12.5 per cent) and value added tax (VAT).
While there is no indication of what the GST rate will be, experts put it between 18 and 22 per cent which will, in all likelihood, make basic goods cheaper.
Certain essential items such as raw food articles are not taxed at present and are expected to remain out of GST.
The key products that would witness price reduction under GST are luxury automobiles, processed food, FMCG and pharma products.
Processed food will continue to be taxed, but the applicable GST is likely to be lower than the current combined tax on such products. Hence, expect these to become slightly cheaper.
The services that may witness increase in cost are telecom, rent-a-cab, movies, music concerts and tickets for sports events like IPL, according to Mahesh Jaising, Partner, BMR & Associates LLP.
Tax advisory firm Nangia & Co said essential services for mass consumption may see a lower rate as they may be kept in lower tax bracket.
Investment management and insurance premiums, which attract a service tax now, may also become costlier with the higher rate of GST.
"GST is a mixed bag for the telecom sector. Customers are presently paying 15 per cent on cell phones and data card, which may see an upward movement. However, DTH players and cable companies may see a reduction in cost of services," said Nitish Sharma, Partner (Indirect Taxation) Nangia & Co.
Economic Laws Practice Partner Rohit Jain said common man could see some price escalation in services, while the taxation of real estate sector needs some clarity.
"For a common man, the cost of services may go up, but there will be a reduction of price of goods," Jain said, adding that land should be kept out while calculating the tax for purchase of real estate property.
The total levy paid in buying a real estate property from a builder currently is 7 per cent (5 per cent Service Tax plus about 1-2 per cent VAT).
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For FMCG and pharma products, the manufacturing hubs for such products are influenced by the excise/state incentive schemes. Under GST, the manufacturing locations may be readjusted from a commercial perspective and have an impact of prices of such goods.
Goods attract an excise duty of 12.5 per cent and a VAT of 12.5-15 per cent depending on the state. Further, there are numerous cascading of taxes on account of levy of CST, input tax credit retention under the VAT laws, levy of entry tax/ Octroi/ local body tax, etc till the time the product reaches the end customer.
A combined effect of these taxes lead to an effective incidence of indirect taxes in the range of 23-25 per cent for the consumer.
"Under the GST regime, there would be a significant reduction in the overall indirect tax cost and increased credit flow for the manufacturers. This reduction in indirect tax cost can lead to reduction in production cost and increase in base line profits, which would in turn give headroom for reducing prices for end-users," Jaising said.
Nangia & Co's Sharma said GST would significantly reduce logistics costs across the value chain and lead to improved margins as a result of lower transportation costs.
ICRA, in a report said, that the tax base would widen under the GST regime to cover the unorganised sector, thereby protecting the Governments' revenues. This could also lead to the organised sector gaining an edge in sectors which have a strong presence of unorganised players.
"The GST rate applicable to services is expected to be higher than the current service tax rate, thereby offsetting the revenue loss from organised sector manufactured goods. However, this may have an adverse impact on demand for services," ICRA said.
